Is Fidelity’s New 401(k) Option too Risky for You?

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Fidelity Investments’ new retirement plan could be risky but is right for you if you want to save more.

A group of US Senators questioned Fidelity Investments regarding whether they allowed people to invest in cryptocurrencies. Legislators said investing in cryptocurrency was risky because it was volatile, illiquid, and speculative. They also noted that some investors had lost large amounts of money when they invested in cryptocurrencies. However, Fidelity Investments responded by saying that it would allow individual investors to invest in cryptocurrencies. We’ll examine the pros and cons of including cryptocurrencies in your retirement plan.

A financial planner could help you decide which investments would be best for your retirement plan.

Why did US senators call out Fidelity Investments for their role in creating tax loopholes that

Sens. Elizabeth Warren (D-Mass.), Richard Durbin (Ill.), and Tina Smith (Minn.) sent a letter to Fidelity Investment CEO Abigail Johnson criticizing the company for allowing its clients to invest in Bitcoin.

As one of the largest 401K providers, Fidelity must know that Americans’ retirement savings are at risk. While the average 401K balance is $129,157, the average balance for 401K accounts is just $33.47. With Americans living longer today than ever, it is obvious that too many retirees will likely outlive their balances during their golden years.

There is growing interest among employers for vehicles that allow them to provide their employees access to digital asset investments in defined contribution plans. There is increasing interest among individual investors who want to include cryptocurrencies in their long-term investment portfolios.

While most Americans are lucky enough to afford an employer-sponsored retirement savings program, others aren’t so fortunate. They may be unable to save money because they simply don’t have enough income to cover basic expenses.

“The fact that Fidelity allows investors to put their savings into an untested, highly risky investment called bitcoin is appalling.”

What Is Bitcoin?

Bitcoins are a type of digital currency which was designed as an alternative to traditional currencies. They’re not backed by anything tangible (like gold) so they don’t have value because people believe they have value.

Bitcoins are created by miners who solve complex mathematical equations. When they solve an equation, they create a unique number sequence, which is then given to the bitcoin.

From an investment perspective, although Bitcoin won’t become available for purchase through Fidelity Investments’ target date retirement funds any time soon, the company has already started laying the groundwork for such purchases by launching two Bitcoin-related exchange-traded funds (ETFs) – one of which is called FIDELITY CRYPTO INDUSTRY AND DIGITAL PAYMENTS ETN (FDIG).

From April 2022, FDIG offers exposure to blockchain technology, cryptocurrency, and digital payment processing companies. Among its top holdings are companies such as Block Inc., Coinbase Global Inc., Bit Digital Inc., Riot Blockchain Inc., and Clean Spark Inc.

Benefits and Risks of Bitcoin

Experts and investors praise Bitcoin for its ability to be an inflation hedge with a fixed maximum supply and unpredictable tendencies.

Bitcoin proponents argue that its fixed number of bitcoins gives them scarcity and protects their value during times of high currency inflation. Central banks differ because they can increase and tighten money supplies depending on economic conditions.

Bitcoin prices can quickly rise and fall in value. In early 2017, the cryptocurrency was worth about US$1000 but soared to nearly $20,000 in late 2017. By April 2021, the price had fallen to under $6000. However, in August 2018, the price rose again to nearly $10,000 before falling back to $7200 by January 2019.

Despite its volatility, financial advisors remain interested in investing in cryptocurrencies. According to a survey by Nasdaq, 72 percent say they would be willing to invest more in cryptocurrencies if an exchange-traded fund (ETF) for Bitcoin were available.

A Bitcoin exchange-traded fund (ETF) is an investment vehicle that tracks the performance of bitcoin.

According to the survey, most cryptocurrency investors (86%) plan to increase their investment in the coming year. Additionally, half of them use bitcoin-based exchange-traded funds (ETFs) for their investments. Another 28% plan to invest in these products too.

Investors looking to invest in Bitcoin as protection against inflation should be aware that the crypto market has closely followed the stock market’s performance since 2022. And this has caused concerns that investor sentiment in the stocks market may spill over into the crypto markets.

According to Morningstar, the correlation between Bitcoin and other asset classes has gradually increased over the past several years.

Before considering offering a crypto fund in a retirement account, employers must exercise extreme caution.

Sens. Warren, Schumer, and Collins highlight this risk too.

Perhaps most troubling is that in acknowledging that it knows about the dangers associated with investing in bitcoin and digital assets but is moving forward anyway, Fidelity acknowledges that it is well aware of these dangers yet is choosing to proceed anyway.

Bottom Line

You shouldn’t invest in cryptocurrencies without doing your homework first. Even though some people think they’re a good investment because they’ve been growing for years, there’s no guarantee that they’ll keep going up forever. On top of that, investing in cryptocurrency has become increasingly correlated with the stock market’s performance.

A financial planner is important to reach your long-term financial goals. You can talk to them without paying any fees.